T R A N S A C T I O N S OF S O C I E T Y OF A C T U A R I E S
1 9 6 1 VOL. 1 3 PT. 2
D456
DISCUSSION OF SIYBJECTS OF SPECIAL INTEREST
Financing Plans for New Agents
What criteria are reasonable for validation schedules in financing plans
for new agents
(i) during the financing period,
(ii) at the end of the financing period?
Should the progression of earnings be in proportion to financing payments
or should a different progression be expected of agents financed at higher
levels? What are the merits of a schedule with higher relative requirements
for the lower financing levels?
MR. E D W A R D G. N E W C O M B : The most important period in evaluating an agent's chances of succeeding and validating his finance plan comes
during the first few months. There is no substitute for good training, close
supervision and continual analysis of sales patterns, especially during this
period. Many of our successful general agents rely heavily on weekly reports of sales activity.
During the first six months, good patterns of activity are probably
more important than actual financial results. Thus lives and volume may
be better criteria than annualized commissions, within this time, in measuring future financial success. Thereafter the more direct financial bearing
of annualized commissions, especially if there are charge-backs for any
first year lapses, appears to be the best measure. Although a number of
criteria are used informally, validation in the Northwestern's finance
plan is based formally only on cumulative annualized first year commissions for each quarter-year throughout a three-year period.
Recently the Million Dollar Round Table published some statistics on
the success pattern of its members which alarmed some of our general
agents. One of them was quite concerned that a number of these men
wouldn't even validate our $400 per month finance plan! These figures
were, I ' m sure, distorted by quite a mixture of production going back
into the 1930's when a dollar was worth two dollars. Just to get some
better evidence on this point as it might relate to the second part of this
subject, we reviewed the production patterns of a group of fifty agents
who were million dollar producers in our Company last year, who were inducted between the years 1946 and 1955, and who had no previous experience in the life insurance business. We compared this group with a
similar group of half-million dollar producers. These facts seemed evident:
1. The million dollar producer shows only a small amount of superiority
in production in his first year. Lives and premiums were only about 6%
greater. Volume was more significant at 25% greater.
2. By the end of a three-year period, the difference is more marked but still
not in proportion to the ultimate. Lives and premiums of the million dollar
producer were about 20% greater while volume was 50% greater.
AGENCY PROBLEMS
D457
3. Most of the relative difference in ultimate production occurs after the financing period. While the typical million dollar producer continues to grow and
reaches his first million about the seventh or eighth year, the half-million
dollar producer tends to level off after three years.
These figures provide some evidence that the man who ends up a
bigger producer has a steeper progression of earnings, but while he tends
to show up better in the first year, he is not too much better.
In regard to the man who is judged to be of lower success potential
with lower financing requirements, I think there is good evidence that a
minimum validation schedule should be used. The L.I.A.M.A. has some
good industry results showing that an agent must reach some minimum
level of production in his first six months, regardless of financing level, to
have much chance of staying in the business. Having a minimum validation schedule tied to lower financing payments would allow a man financed at the lower level to have an increased scale of earnings just for
validating. If he doesn't produce these results, the odds are he won't be
long in this business.
MR. LYALL M. SPRUNG: A report recently published by the
L.I.A.M.A. on "Agent Financing" (File #344) gives an excellent r~sum~
of the criteria to be considered when constructing validation schedules
for agent financing plans. This discussion will therefore be limited to a
brief review of the financing plan adopted by the Mutual Life of Canada
at the beginning of December 1957 and the company's experience under
the plan to date.
The career compensation plan provides a basic monthly allowance
payable semimonthly during a two-year training period of an amount
sufficient to meet the agent's normal operating expenses. Care is taken in
establishing the allowance to determine the actual need of the agent and
his family. The allowance paid is not a salary but is a guarantee that commissions during the two-year period will be at least equal to the amount
of his allowance. There is a 10% increase in the amounts after six months,
as experience has indicated that incomes of agents frequently require revision after a six-month period. The agent is entitled to an incentive increase when validation requirements are exceeded; these are determined
at the end of six months and quarterly thereafter and are based on the
agent's performance.
Validation is based on cumulative cash commissions. Validation requirements vary directly in proportion to the amount of financing.
Table A illustrates the survival history to date of agents who were appointed under the career compensation plan in the years 1957 to 1960, inclusive. The full two-year history is available for 1957 and 1958 appointees, and it is to be noted that the experience is similar.
D458
D I S C U S S I O N OF S U B J E C T S OF S P E C I A L I N T E R E S T
Tables B and C illustrate the subsequent survival history of those
agents who completed six months under the financing plan. Of the 1957
appointees, 76 completed six months under the financing plan; 28 of
these, at the discretion of the company, had been allowed to continue
under the plan although they were slightly below validation requirements.
Only 5 of these 28, or 18%, successfully completed the two-year period of
the financing plan, whereas 81°-/o, or 39 out of 48 agents who were above
the validation requirements at the end of the six-month period, survived
the full two years under the financing plan. Likewise, for 1958 appointees,
only 22% of those who were below validation requirements at the end of
six months completed the two-year period, whereas 76°f~ of those who
were above validation requirements completed the two-year period.
These figures indicate that if an agent is not successful in the business at
the end of six months, the odds are against his being successful later on.
TABLE A
Year of
Appointment
Number of
New Agents
Financed
1957 . . . . . . . . .
1958 . . . . . . . . .
1959 . . . . . . . . .
1960 . . . . . . . . .
Survived
6 Months
122
142
113
125
76
91
81
78
(62%)
(64%)
(72%)
(62%)
Survived
1 Year
Survived
2 Years
65 (53%)
44 (36%)
52 (37%)
69 (49%)
60 (53%)
(Not available)
(Not available)
TABLE B
Year of
Appointment
Survivors below
Validation
Requirements at
Survived
1 Year
Survived
2 Years
End ot 6 Months
18 (64%)
14 (44%)
28
1958 . . . . . . . . . . . .
32
5 (18%)
7 (22%)
TABLE C
i Survivors above
Year of
Appointment
Validation
, Requirements at
I Year
Survived
2 Years
47 (98%)
55 (93%)
39 (8t%)
45 (75%)
Survived
End ot 6 Months
1957..
1958..
48
59
AGENCY PROBLEMS
D459
MR. JOHN C. MAYNARD: Under the Canada Life training plan, the
training allowance is a constant for each representative inducted and does
not depend on the amount of financing. The result of this is that the commissions required for validation are relatively higher for the larger
amounts of financing. We believe this feature has advantages over other
plans for which the training allowance varies from individual to individual:
1. There is an automatic brake acting to restrain the amount of financing which
is applied for.
2. It is easy to change from one financing schedule to another as the representative progresses through the training period.
However, if this system were followed completely it would result in
commission requirements which would be too low at the lower levels of
financing. As a result of this, the validation commissions at these low
levels have been adjusted upward so that the validation commission at the
end of the training period is at least equal to the amount of financing for
the given schedule.
We feel that there are a number of reasons for a fairly steep grading
down of the training allowance over the three years of the plan:
1. The debit balance is held to low figures.
2. The allocation of training allowance in the third year is quite low and it is
then reasonable for the allowance to be dropped entirely at the end of the
training period.
3. For a given amount of financing it is desirable to set the training allowance
in the first year high enough so that full credit can be taken for training
allowances in the inside limit of Schedule Q.
The validation requirements under our present training plan, which are
on a cash commission basis, are currently being revised because of a substantial increase in the amount of new business being written on the preauthorized check plan. This problem is being resolved by annualizing the
commissions on preauthorized check business at the time the third
monthly premium is paid, and then making subsequent charge-backs if
the policy lapses later in the first year.
As a result of this change a new schedule of validation commissions and
allowances is required. It is planned that a new schedule will be adopted,
depending on the following assumptions:
1. The proportions of business by mode of payment for the average new agent
are: annual 22%, semiannual 9~o, quarterly 12%, monthly 12e/o, and preauthorized check 45o~.
2. The lapse rates for the average new agent will be higher than for seasoned
agents. Separate lapse rates have been developed by mode of payment
and made to conform to the following lapse rates for two policy years: annual
23%, semiannual 34%, quarterly and PAC 400"/0,and monthly 45%.
D460
DISCUSSION OF SUBJECTS OF SPECIAL INTEREST
3. Production increases by 50% over the first year of the training plan, by 17%
over the second year, and is level during the third year of the plan.
MR. ABRAHAM HAZELCORN: The Guardian has a salaried field representative plan which establishes a salary for the first year, but allows
for future incentive compensation if earnings exceed such salary. The
validation schedule, which incidentally is based on life and health cash
premiums in the first employment year, actually has higher relative requirements for the higher salaries.
Our validation schedule, which doesn't begin until the end of the third
month of employment, increases very steeply until the end of the twelfth
month and levels off gradually thereafter. We hope thereby to help the
man who is first introduced to the life insurance sales business during his
first few months, but not to carry him too far so that he is with us for a
couple of years before he finds that he is not suited for the business.
We reduce the relative validation requirements after the first employment year. We feel that our early requirements are sufficiently rigid so
that a relaxation in later employment years is in order.
MR. HARRY D. GARBER: Under the Equitable's financing plan an
agent receives a basic salary, which reduces over the financing period,
plus one-half of the regular first year commissions and full renewal commissions. If his commission earnings exceed the validation requirements
by a specified amount, he will receive more than the basic salary pattern.
If his earnings fall short of validation requirements but meet 8 0 ~ of
them, we will still finance him, but at 80% of the basic salary.
Validation requirements are proportional to the amount of initial
salary granted. We base our validation strictly on cash commissions, no
special adjustments being made for those classes of business on which we
annualize first year commissions--preauthorized check plan, salary savings, our assured home ownership, and armed service allotment. Because
it is on cash commission basis, we don't have a validation requirement
until four months have elapsed. The remaining validation requirements
occur at six months and then every three months thereafter.
At the time of the last revision of our financing plan we studied the
sales patterns during the first three years for our successful agents,
classifying the agents on the basis of the amount of business which they
are now writing. Using these data and a set of assumed lapse rates and
distributions of new business by mode of premium payment, we developed
the new validation schedule. We then fitted a salary schedule to the
validation requirements such that the resulting combined income to an
agent just meeting these requirements would be roughly level throughout
the financing period.